World Bank data shows India need a GDP growth of 18% over 20 years to solve its job puzzle. To solve the crisis, it is imperative India refrains from 'doing a China'.

Employment in cab-hailing services such as Uber and Ola alone increased from 300,000 in 2015 to over (projected) 10,00,000 in 2018, according to the June 2017 McKinsey report.

The World Bank asked an important question in a report released last fortnight (‘Jobless Growth? South Asia Economic Focus Spring 2018’,
goo.gl/5bV2ar
. How much should India grow to provide adequate employment to its labour force? My colleague Sakshi Gupta had raised a similar issue in her March report. The answers that both seem to have arrived at are alarming, to put it mildly.

The World Bank’s estimate for India’s desirable GDP growth, if it were to try and catch up with employment rates of countries with similar living standards, would have to be about 18% on average over the next 20 yrs. If it were merely to try and keep its employment rate constant, the economy has to clock roughly 12%. Gupta’s model produces a ‘target’ growth of 13% over the next 10 years.

Numbers in the BlenderA little technical stuff is warranted to show how these numbers are generated. The relationship between employment and desirable growth rates does not involve complex economics, just a careful combination of demographic, labour market and growth data. Demographic data and the labour force participation rate give an idea of the number of job seekers. Combining employment growth and GDP growth gives us the sensitivity of job creation to economic growth.

This ‘sensitivity’, or elasticity, of jobs to growth is key. If you know what a percentage point of GDP growth produces in terms of jobs, you can use the good old-old unitary method (remember Class 5 arithmetic?) to figure out what rate of GDP growth would produce the number of jobs that keeps the dole queue in check.

Two things may be fairly obvious. First, India’s current growth rates of 7-8% on average might be world-beating. But it’s just not good enough to keep our working-age population ‘fully’ employed. Second, getting growth up to the rates that these studies estimate is not just challenging, it may be well-nigh impossible.

This does not, however, mean that we are doomed to demographic dystopia for the coming decades. The trick for policymakers is to try and increase the sensitivity of job-creation to growth. The average elasticity of jobs to growth that Gupta gets from the data (similar to the World Bank) is 0.17 — that is, a percentage point increase in GDP leads to a fairly low increase of just 0.17% in jobs. Incidentally, this data is kosher and drawn from official GoI data sources.

How does one increase this sensitivity? Based on a detailed analysis of the job-creating capacities of different segments, Gupta arrives at a couple of important conclusions.

First, it is imperative that India finally jettison its manufacturing fetish and focus on services and construction. The maths is simple. The average employment elasticity for construction is about 1— that is, every percentage point increase in growth leads to a similar increase in jobs. The elasticity of the manufacturing industry —0.34 — is paltry in comparison.

There are large variations between different categories within ‘services’. The category that stands out as an engine of job-creation is the heterogeneous ‘other services’, a smorgasbord of things like coaching and tuition, healthcare, health and personal care. These involve varying degrees of skill, but have some common features.

They are likely to involve small business set-ups and are reasonably immune to business cycles. Segments like health and personal care can feed off other sectors like tourism (both regular and medical varieties) that still has a long way to go.

Bonsai Green ShootsSome financial support through agencies that fund micro and small enterprises can help this sector ramp up sharply. Thailand has had enormous success with this. For the casual empiricist, a quick glance at the advertisements for cosmetic dentistry in the Bangkok Post may be a good gauge.

It is also important not to dismiss some of the emerging sectors like digital systems and the networks they help to create. Not only are these networks (e-commerce and online aggregators) creating direct job opportunities, but they are also boosting allied ecosystems such as logistics and warehousing.

Employment in cab-hailing services such as Uber and Ola alone increased from 300,000 in 2015 to over (projected) 10,00,000 in 2018, according to the June 2017 McKinsey report, ‘India’s Labour Market: A New Emphasis on Gainful Employment’, goo.gl/fX5CHH). You can go further down the skill ladder and find large increases in courier and delivery services that employ unskilled or semi-skilled workers.

This does not mean that we should forget about manufacturing altogether. A lot can be done to boost its employment elasticity. Changes in labour laws seem to have a large pay-off.

The ‘formalisation’ of fixed-term contracts, for instance, seems to have had a tangible impact on hiring. As the next step, the draconian laws governing apprenticing need to be overhauled to give industries an incentive to take on school-leavers or fresh graduates.

The bottomline, however, is that manufacturing on its own cannot rise to the huge demographic challenge that confronts it. Can India finally reconcile to the fact that the option of ‘Doing a China’ — in the sense of trying to rev up large-scale low-end manufacturing — no longer exists?

The writer is chief economist, HDFC Bank

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)